Question

Exercise 21A-4 a-d Assume that on December 31, 2016, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement: 1. The agreement requires equal rental payments of $66,499 beginning on December 31, 2016. 2. The fair value of the building on December 31, 2016 is $486,311. 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $9,500, and an expected residual value of $7,100. Kimberly-Clark depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. 5. Kimberly-Clark's incremental borrowing rate is 8% per year. The lessor's implicit rate is not known by Kimberly-Clark. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2016, 2017, and 2018. Kimberly- Clark's fiscal year-end is December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to O decimal places e.g. 5,275.) Debit Credit Date Account Titles and Explanation 12/31/16 (To record the lease) (To record first lease payment) 12/31/17 (To record amortization of the right-of-use asset) (To record interest expense) 12/31/18 (To record amortization of the right-of-use asset) (To record interest expense) Suppose the same facts as above, except that Kimberly-Clark incurred legal fees resulting from the execution of the lease of $5,000, and received a lease incentive from Sheffield to enter the lease of $1,000. How would the initial measurement of the lease liability and right-of-use asset be affected under this situation? Right-of-use asset SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Suppose that in addition to the $66,499 annual rental payments, Kimberly-Clark is also required to pay $5,000 for insurance costs each year on the building directly to the lessor, Sheffield Storage. How would this executory cost affect the initial measurement of the lease liability and right-of-use asset? (Round answer to o decimal places, e.g. 5,275.) Lease liability Now suppose that, at the end of the lease term, Kimberly-Clark took good care of the asset and Sheffield agrees that the fair value of the asset is actually $9,500. Record the entry for Kimberly-Clark at the end of the lease to return control of the storage building to Sheffield (assuming the accrual of interest on the lease liability has already been made). (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit

Answer 1

The difference between the guaranteed residual value and expected residual value should be considered for the calculation of the present value of minimum lease payments

Guaranteed residual value by the lessee	$         9,500
Expected residual value	$         7,100
Difference	$         2,400

Calculation of Present value of Miniumum lease payments
Date	Payments	PV factor $ 8%	PV of Minimum lease payments
December 31,2016	$       66,499	1	$           66,499
December 31,2017	$       66,499	0.92593	$           61,573
December 31,2018	$       66,499	0.85734	$           57,012
December 31,2019	$       66,499	0.79383	$           52,789
December 31,2020	$       66,499	0.73503	$           48,879
December 31,2021	$       66,499	0.68058	$           45,258
December 31,2022	$       66,499	0.63017	$           41,906
December 31,2023	$       66,499	0.58349	$           38,802
December 31,2024	$       66,499	0.54027	$           35,927
December 31,2025	$       66,499	0.50025	$           33,266
Difference of residual value	$         2,400	0.50025	$             1,201
			$       4,83,112

Lease amortization table
Date	Lease payment	Interest expense on unpaid lease liability (8% on balance of lease liability	Reduction of lease liability	Balance of lease liability
December 31,2016				$ 4,83,112
December 31,2016	$       66,499	$                      -	$           66,499	$ 4,16,613
December 31,2017	$       66,499	$       33,329.00 (416613*8%)	$           33,170	$ 3,83,443
December 31,2018	$       66,499	$       30,675.40 (383443*8%)	$           35,824	$ 3,47,619
December 31,2019	$       66,499	$       27,809.52 (347619*8%)	$           38,689	$ 3,08,929
December 31,2020	$       66,499	$       24,714.36 (308929*8%)	$           41,785	$ 2,67,145
December 31,2021	$       66,499	$       21,371.59 (267145*8%)	$           45,127	$ 2,22,017
December 31,2022	$       66,499	$       17,761.39 (222017*8%)	$           48,738	$ 1,73,280
December 31,2023	$       66,499	$       13,862.38 (173280*8%)	$           52,637	$ 1,20,643
December 31,2024	$       66,499	$         9,651.45 (120643*8%)	$           56,848	$     63,796
December 31,2025	$       66,499	$         5,103.65 (63796*8%)	$           61,395	$        2,400
Total	$   6,64,990	$         1,84,279	$       4,80,711

December 31,2016	Right of use asset	$    4,83,112
	Lease liability		$ 4,83,112
	(To record lease)
December 31,2016	Lease liability	$        66,499
	Cash		$     66,499
	(To record first lease payment)
December 31,2017	Depreciation ((483112)/10	48311.2
	Right of use asset		48311.2
	(To record amortization of right to use of asset)
December 31,2017	Interest expense	$ 33,329.00
	Lease liability	$        33,170
	Cash		$     66,499
	(To record interest expense)
December 31,2018	Depreciation ((483112-2400)/10	48311.2
	Right of use asset		48311.2
	(To record amortization of right to use of asset)
December 31,2018	Interest expense	$ 30,675.40
	Lease liability	$        35,824
	Cash		$     66,499
	(To record interest expense)

All expenses incurred by lessee, relating to lease should be added to the right to use of asset and amortize over the lease term.

Right to use of asset	$   4,83,112
Add: legal fee	$         5,000
Less: Lease incentive	$       (1,000)
Right to use of asset	$   4,87,112

Expenses incurred by lessee should not affect the lease liability. Hence 5000 yearly insurance expenses should be recorded as operating expenses by the lessee.

Lease liability

$           4,83,112

Lesse should debit 2400 balance in lease liability and record the differenc of $7,500 (9500-2400) residual value should be record as receivbale from lessor and recognzie entnrie $9,500 as gain from lease.

Sheffield	$         7,100
Lease liability	$         2,400
Gain on lease		$               9,500